Salary or Monthly Dividends

[nodric]

A point of discussion has arisen in the thread about a contractor ManCo concerning taking monthly dividends instead of, or to supplement salary.

As another poster also commented there is legislation known as ERS (Employee Related Securities) and seems to amongst many things, cover how shareholding directors, and ordinary shareholders working for a company, should take dividends from the company.

Employment Related Securities – Finance (No 2) Act 2005

The rules relating to employee share acquisitions were completely rewritten in Schedule 22 to the Finance Act 2003 in an attempt to put a stop to the use of arrangements involving shares and securities as a way of avoiding income tax and NIC on what were, in commercial terms, payments of remuneration.

A further very important development in this area was the Paymaster General's statement on 2 December 2004 in which she stated,

"I am therefore giving notice of our intention to deal with any arrangements that emerge in the future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today."

This clear announcement of the intention to introduce retrospective legislation to 2 December 2004 should be kept in mind together with the new anti-avoidance tests whenever schemes involving employee shares are being considered.

In simple terms, if you take dividends in place of an adequate salary, and you then require those dividend payments to be able to live (survive), then Hector can/could consider it simple tax avoidance, and tax such dividends as personal salary.

My open questions to the masses is:

1. How do you treat dividends - Essential income (no dividend no food), or additional income (can live without it, but love the fact it's there).

I accept that as a rule a shareholder will such out as much as possible in dividends so as to be able to use that money without restriction, but that's more the motivation rather than the method.

2. What do your accountants advise. (Accountants feel free to jump in)

[Jaws]

Doesn't being outside of IR35 mean you are not in employment?

My accountant advises a salary of around £5.7k because I am not an employee of my business and I'm certainly not an employee of my client either.

[Clare@InTouch]

Doesn't being outside of IR35 mean you are not in employment?

My accountant advises a salary of around £5.7k because I am not an employee of my business and I'm certainly not an employee of my client either.

You are an employee.

You're not being employed to do the 'day job' that's true, the salary is more to compensate you for your duties as a director.

[norrahe]

Should it actually matter when and how you pay dividends?

[malvolio]

What Dim Prawn was wittering on about in her usual confused manner was companies giving shares to employees as bonus payments, thereby avoiding the NIC element of wwhat was actually contractually defined earned income. Needless to say she and the rest of the NL heirarchy were incapable of distinguishing between that practice and people having shares in their own companies. You could ask why they made that basic error when that was what IR35 was supposed to shut off, and clearly failed to do so, but that juist about sums up their intelligence level.

With our new business-aware government there's a fighting chance they will have the wit to appreciate the difference between BigCo dishing out shares for free to minimise tax artificially as opposed to people putting their own money, time and effort into creating profits for dividend distribution in their own company.

Then again we are talking about politicians here; we should never underestimate their real-world ignorance...

[nodric]

Hopefully an accountant or two will jump in with their views.

The fact seems to be (is), that we [contractors] take dividends as shareholders in our companies to avoid NI. In Belgium, and most of the EU, this is a common practice to avoid paying high SS. In Belgium it's 12% FFS! On a 36K Euro salary (about 32K GBP) you pay 12K Euros SS! Tax then quickly eats another 32ish%, up to 50% if you pay yourself a dime or two more!

Dividends however, are taxed at 25% (15% with some hoop jumping).

Clearly in non UK locations, we use dividends to live off, or we'd have a shi**y standard of living

It seems in the UK, there is legislation to prevent this, or so Hector would have us believe.

So I am very interested to know if the practice of minimal salary, big dividends paid monthly, is the norm for the UK lads n lasses, or if a more careful approach is adopted. i.e. Sensible salary, and periodic dividends.

[Sergeant Murphys Cosh]

How often can I pay dividends?

"Dividends can be paid as often as you choose. It is a myth that contractors who pay themselves dividends monthly are more likely to be caught by IR35. They are your profits so you can take them when you like, as long as you leave enough money behind to ensure you can meet your tax obligations".

[SackmanandCo]

HMRC cannot tell companies how they should split dividends and salaries. As long as you follow the correct procedures, there will not be a problem.

[lje]

I pay myself a salary of £15,000. When this is combined with my husband's salary we can quite happily live our normal lives. I take dividends once a year and treat the money as extra savings. Whilst this isn't the most tax efficient way of doing things it does suit my lifestyle.

[SallyPlanIT]

There was a case last year that HMRC won at a first tier tribunal case; namely PA Holdings, whereby dividends were challenged as disguised remuneration. Whereby PA Holdings were not structured in the typical freelancer / contractor Limited Company manner, what is to stop the revenue applying it to this market?

An attitude to risk should be considered when setting a salary level. People adverse to risk may wish to consider a higher salary to support their living expenses. Ideally, the lower the salary the more infrequent the dividends.